Question

Pick 5 of the concepts below and explain in 50 words maximum each selected concept:

GATT and Trade rounds

National Treatment and non-discrimination (Most favored nation status)

Adam Smith’s “The invisible hand” and Mercantilism

Lender of last resort and IMF conditionality

Comparative advantage vs. absolute advantage

Shallow integration v. deep integration

Foreign direct investment (FDI) and name two types of FDI’s

Bretton Woods conference

Answer 1

1) Bretton Woods Conference

Bretton Woods Agreement of 1944 established a new global monetary system. It replaced the gold standard with the U.S dollar as the gobal currency. By so doing, it established America as the dominant power in the world eeconomy.After the agreement was signed,America was theonly country with the ability to print dollars.

The Agreement created the International Monetary Fund (IMF),U.S backed oraganisations that would monitor the news system.

The Bretton Woods Agreement

The Bretton Woods Agreement was created in a 1944 conference of all of the World War II Allied nations. It took place in Bretton Woods, New Hampshire.

Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currency value became too weak relative to the dollar, the bank would buy up its currency in foreign exchange markets.

Members of Bretton Woods System agreed to avoid trade wars. For example, they would not lower their currencies strictly to increase trade. But they could regulate their currencies under certain conditions.

Replacing the Gold Standard

Before Bretton Woods, most countries followed the gold standard. That meant each country guaranteed that it would redeem its currency for its value in gold. After Bretton Woods,each member agreef to redeem its currency for U.S dollars, not gold.

The transition created more demand for dollars,even though its worth in gold remained the same. This discrepancy in value planted the seed for the collapse of the Bretton Woods System three decades later.

Why the Agreement was needed

Until World War I, most countries were on the gold standard. However, they cut the tie to gold so they could print the currency needed to pay for their war costs. This inflow of currency caused hyperinflation, as the supply of money overwhelmed the demand. After the war, countries returned to the safety of the gold standard.

All went well until the Great Depression. After the 1929 stock market crash, investors switched to commodities trading. It drove up the price of gold, resulting in people redeeming their dollars for gold. The Federal reserve made things worse by defending the nation's gold reserve by raising interest rates.

Role of IMF and World Bank

The Bretton Woods System could have worked without the IMF. Member countries needed it to bail them out of their currency values fot too low. They would need a kind of global central bank they could borrow from if they needed to adjust their currency's value and did not have the funds themselves. Otherwise they would slap on trade barriers or raise interest rates.

The Bretton Woods countries decided against giving the IMF the power of a global cebtral bank. Instead they agreed to contribute to a fixed pool of national currencies and gold to be held by IMF. Each member country of the Bretton Woods System was then entitled to borrow what it needed,within the limits of its contributions. The IMF was also responsible for enforcing the Bretton Woods agreement

The Collapse of the Bretton Woods System

In 1971, the United States suffered from massice stagflation- a combination of inflation and recession, which causes unemployment and low economic growth.

In response to a dangerous dip in value caused by too much currency in circulation, President Nixon started to deflate the dollar's value in gold. Nixon devalued the dollar 1/38 of an ounce of gold and then to 1/42 of an ounce.

The devaluation plan backfired. It created a run on the U.S gold reserves at Fort Knox as people redeemed their qucikly devaluating dollars for gold. in 1971, Nixon unhooked the value of dollar from gold altogether. without price controls,gold quickly shot up to $120 per ounce in the free market, ending the Bretton Woods System.

2) Foreign Direct Investments and its types

Foreign Direct Investment or FDI is an investment made by a foreign entity (an individual or a company) into a business based in another country. FDI is characterised by a notion of direct control and is not simply the transfer of monetary funds. A lasting interest differntials foerign direct investment from foreign portfolio investment.

Methods of FDI

There are many ways by which a foreign investor can make a foerign direct investment. investors can expand their business in another country. They cam also acquire voting stocks of a business based outside their country. This are some of the ways by which investors can penetrate a foreign market through overseas direct investment.

• Mergers and Acquisitions
• Getting voting stocks in a business based in another country
• Joint ventures with firms based overseas
• Starting a subsidiary of a domestic firm in a foreign country.

Types of FDI

There are mainly two types of FDI -Horizontal and Vertical. However,two other types of FDI have emerged conglomerate and platform FDI.

• Horizontal FDI : under this type of FDI, a business expands its inland operations to another country. The business undertakes the same activities but in a foreign country.
• Vertical FDI :in this case, a business expands into another country by moving to a different level of the supply chain. Thus business undertakes different activities overseas but these activities are related to the main business.
• Conglomerate FDI :under the type of FDI, a business undertakes unrelated business activities in a foreign country. This type is uncommon as in involves the difficulty of penetratimg a new country and an entirely new market.
• Platform FDI : here, a business expands into another country but the output from the business is then exported to a third country.

Apart from being a critical driver of economic growth,FDI also helps bring in more job opportunities, new technology,managerial expertise, and improved infrastructure.

3) Adam Smith's "The Invisible hand " and Mercantilism

We celebrate in 1976 the bicentennial of two significant events, the sigining of the American Declaration of Independence and the publication of The Wealth of Nations by Adam Smith.

Smith had made a name for himself with an earier volume entitled Theory of the Moral Sentiments, published in 1759, but he is now remembered mainly for his Wealth of Nations, on which he labored for ten years. The Wealth od Nations sold briskly in the American colonies, same 2500 copies within five years of publication,even though our people were at war. This is remarkable fact, for there were shores two centuries ago,a nd about one-third of these were Loyalists. In England, as in colonies, there were two opposed political fractions-Whigs and Tories. THE Tories favoured the king and the old regime: the Whigs worked to increase freedom in soceity. Adam Smith was a Whig; the men we call Founding Fathers were Whigs. There was a Whig faction in the British Parliament and many Englishmen were bound to the American cause by strong intellectual and emotional ties.

Mercantalism

The nations of Europe at this time embraced a theory of economic organisation called "Mercantalism". It was based upon the idea of national rivalry, and each nation sought to get the better of other nations by exporting merchandise in exchange for gold and silver. The goal of Mercandalism was the enhancement of national prestige by accumlating the precious metals, but the goal was not nearly so significant as the means employed to reach it. Mercantalism was the planned economy par excellence; the nation was trussed up in a strait jacket ofregulations just about as severe as the controls imposed today upon the people of Russia or China. The modern authoritarian state, of course, has more efficient methods of survelliance and control than did the governments of the seventeenth and eighteenth centuries,but the basic idea is similar.

4) GATT and Trade Rounds

The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries,whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas. According to iits preamble, its purpose was the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis".

Gatt was first discussed discueed during the United Nations Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organisation. It was signed by 23 nations in Geneva on 30 October 1947, and took effect on 1 January 1948. it remained in effect on 1 january 1948. The WTO is the sucessor to the GATT, and the original GATT text is still in effect to the modifications of GATT 1994. Nations that were not party in 1995 to the GATT need to meet the minimum conditions spelled out in specific documents before they can accede, in September 2019, the list contained 36 nations.

5 ) National Treatment and Non discrimination

National treatment is a principe in International law. Utilised in many treaty regimes involving trade and intellectual property. it requires equal treatment of foreigners and locals. Under national treatment a state grants particuar rights, benefits or privileges to its own citizens of other states while they are in that country. In the context of international agreements, a state must provide eqyal treatment to citizens of the other states participating in the agreement. Imported and locally produced goods should be treated equally - at least after the foreign goods have entered the market.

While this is generally viewed as a desirable principle, in custom it conversely means that a state can deprive its own citizens. An opposing principle calls for an international minimum standard of justice that would provide a base floor for the protection of rights and od access to judicial process. the conflict between national treatment and minimum standards has mainly played out between industrialised and developing nations, in the context of expropriations. Many developing nations, having power to take control over the property of their own citizens, wished to excercise it over the property of aliens as well.

A most-favoured nation (MFN) clause requires a country to provide any concessions,privileges, or immunities granted to one nation in a trade agreement to all other WTO member countries. Althogh its name implies favoritism toward another countries.

In international trade, MFN treatment is synonymous with non-discriminatory trade policy because it ensures equal trading among all WTO member nations rather than exclusive trading privileges. For example, if a nation reduces tariffs by 5% for one nation, the MFN clause states that all WTO members will have their tariffs cut by 5% into that nation.